ETF - All posts tagged ETF

Preferred shares are the latest income investment suffering losses, with the iShares S&P U.S. Preferred Stock Index Fund (PFF) down 1.3% Wednesday and down 3.9% over the past two weeks. Peter Tchir of TF Market Advisors says it’s all part of a chain reaction in income markets, as each high-yielding asset that sells off makes other such assets that had been purchased for yield looks rich and drags them down too, pretty much the opposite process of what was going on during the last months of the bond bull market. (My colleague Brendan Conway explores whether exchange-traded funds create an accelerant effect that speeds up this process in this post). More from Tchir:

We are seeing continued weakness in preferred stocks. Whether it is lead by the ETF (PFF) or not is hard to tell as the weakness is across the board. This is in spite of relative strength in HY. We continue to think one sector’s weakness is triggering the next and think dividend stocks are the next area to be hit. We still think one more down leg for high yield, but the relative value is making that more attractive and CDS will get squeezed even more than bonds or ETF’s on the bounce when we get it.

Looking at some other big exchange-traded funds in high-yielding areas, the SPDR S&P Dividend ETF (SDY) is down 0.8% Wednesday to $66.90. The iSharesiBoxx $ High Yield Corporate Bond Fund (HYG) is up 13 cents $91.71, and the SPDR Barclays Capital High Yield Bond ETF (JNK) is down a dime to $39.93. The iShares FTSE NAREITMortgage PLUS Capped Index Fund (REM) is down another 1.7% to $13.18.

Bloomberg‘s Lisa Abramowicz reports today that Pimco‘s short-term junk-bond exchange-traded fund, the $1.2 billion Pimco 0-5 Year High Yield Corporate Bond ETF (HYS), saw a record $204.1 million inflow yesterday, while at the same time the State Street‘s SPDR Barclays High Yield Bond ETF (HYG) saw a $378 million outflow, its second-biggest single-day redemption. From Bloomberg:

Pimco, manager of the world’s biggest bond fund, is attracting investors to its ETF, which focuses on debt that’s less sensitive to rising interest rates, with high-yield bonds that mature in five or fewer years poised to outperform dollar- denominated notes on average for the first time since 2008.

Institutional investors are using the funds to make wagers on a market that typically trades off exchanges in over-the- counter transactions as they seek to insulate their investments from interest rates rising from record lows.

“You’re going to see more of these block trades happening here because it’s replacing the credit-default swaps to some degree,” said Peter Tchir, founder of New York-based TF Market Advisors. “People are starting to use it as a way to short blocks of ETFs and then do the exchange.”

Master Limited Partnerships are on a roll so far this year, up 11.6% in price compared to a 6.6% appreciation in the Standard & Poor’s 500 index.

The Alerian MLP Index yield is hovering around 5.5%.

What’s driving the rise? Recovery from a down year and a selloff tied to rising taxes, but there are other key factors for the appreciation, according to a report out today from Morgan Stanley analysts Stephen J. Maresca, Robert S. Kad, Shaan Sheikh and Brian Lasky. One factor is new and growing institutional interest in MLPs, particularly among pension funds:

Other large pension fund MLP allocations Morgan Stanley highlights: $1 million by the St. Charles Police Pension Fund, $950 million by the Pennsylvania Public School Employees Retirement System, and $200 million by the Delaware Public Employees Retirement System.

And there are other reasons for the appreciation. For one thing, more exchange-traded funds and notes, along with …

Peritus Asset Management, which runs the actively managed AdvisorShares Peritus High-Yield ETF (HYLD), on occasion likes to trumpet the advantages of its strategy over passively managed peers, such as the larger SPDR Barclays Capital High Yield Bond ETF (JNK) and the iShares iBoxx $ High Yield Corporate Bond fund (HYG).

With the recent announcement that Dell (DELL) plans to go private in a $24 billion buyout, Peritus this week takes aim at passive management through the lens of leveraged buyouts, particularly the case of Energy Future Holdings, formerly known as TXU. Since a private equity consortium led by KKR took TXU private in 2007 in the largest-ever LBO, valued at $45 billion, TXU has become a byword for the supersized, super-leveraged, top-of-the-market buyout gone awry. The amount of junk-rated debt involved in the deal meant just about every index-tracking bond fund and ETF had some TXU debt, often a lot of it, at some point. Here’s Heather Rupp of Peritus:

However in the five years since, TXU has run into tough times as natural gas prices have declined andtaken electricity prices down with them. The expected cash flows that were going to be used to service this massive debt load have not materialized.

Just last week, they undertook the seventh (yes you read that right) distressed bond exchange, swapping existing bonds for new, longer dated bonds as they attempt to address their refinancing risk. In today’s wide open new issue market, the fact that the issuance market is not there for them and they are instead having to turn to distressed exchanges should wave a big red flag. And some of the new bonds are PIK-toggles (pay-in-kind), meaning that the company has the option to pay the interest payment with more bonds in lieu of cash. This allows the company to reduce their cost of interest, but as an investor begs the question, if a company already can’t service their existing debt, why would you want more of their bonds?

We view this company as case and point of the value of active management in the high yield space. Active managers can avoid investments in companies such as this that are in essence the living dead.

Also this week, a Debtwire story saying Energy Future Holdings had retained Kirkland & Ellis for restructuring services sent the company’s bond and loan prices lower.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.